Nestle USA CEO on Bottled Water, California Drought and Doing Good

Americans are ditching the soda pop for good old H2O.Photograph by Chris Rank —Bloomberg via Getty Images

Nestle, the world’s largest food and beverage company—whose sprawling portfolio includes everything from Gerber baby food, to Lean Cuisine, to Purina cat chow—is on a mission to become the “world’s leading health, nutrition, and wellness company,” as well as an all-around good corporate citizen. To chart its progress, the Swiss behemoth—which articulated its core “Creating Shared Value” strategy years ago—tracks its many commitments to society in a comprehensive yearly report. (They range from reducing sodium in products to implementing water-savings projects.)

In America, where Nestle has a $26 billion business and reaches 97% of homes—and where the company is confronted by an obesity epidemic and drought in California—the food giant’s influence on lives is especially immense. In that spirit, Nestle America published its own second annual social impact report last month. Fortune spoke with Nestle USA Chairman and CEO Paul Grimwood about his company’s ongoing efforts to do good through business.

Questions and answers have been edited for clarity and brevity.

Fortune: What is “Creating Shared Value,” and what’s the significance of your most recent report?

Paul Grimwood: Fundamentally, it is everything that we as a company are trying to achieve within society for the short, medium, and long-term benefit of customers, consumers and society as a whole. At the heart of this movement is the idea that doing good makes good business sense.

This is something we started in the U.S. back in 2013. At the time, we had many good initiatives in place, but we weren’t doing a very good job communicating what we were doing. I thought we could make more progress by being very clear on what we were trying to achieve and how we were going to achieve it.

What are the highlights of this year’s report?

The main highlight for me is that we made progress on 99% of the objectives we set for ourselves in 2013. One of the things I find most fascinating about Nestle’s commitments and the shared value document is how much it actually gets our workforce engaged. Every single employee has a copy of it—and they’ve really embraced it. Not only have they delivered on 99% of the challenges we gave ourselves, but they delivered on them ahead of time.

Can you give an example?

One of the commitments that we gave ourselves was that Nestle USA would go to ‘zero waste to landfill’ in 12 of our plants. That’s quite a challenge—that every single thing that comes out of a factory either has to be used, recycled, used for energy, etc. We set ourselves the challenge of 12, but all the factory managers came back and said “Why only 12?” So we were able to announce at this year that 25 of Nestle USA’s factories had gone to zero waste. Now, the Purina and nutrition factories have committed to doing so by 2020, which means every one of our factory facilities in the U.S. will be zero waste to landfill.

Clearly there’s an environmental benefit. There’s also a commercial benefit—we’re not paying to put product into landfill, so our focus on recycling, reusing, and not having waste happen at all leads to an improvement in business.

Can you tell me about what you’re doing in California? Nestle has drawn a lot of criticism for bottling water there during the drought.

Let’s be honest, everyone in California is concerned about the drought. We recently gave out 8,500 drought kits—one kit to each employee. Everybody has got to play their part, but we at Nestle think we need to set a standard as well for bigger business.

We have a plant called Modesto—it’s a milk and creamer plant that produces products like Carnation. We’re about to put an awful lot of money into that plant. We’re going to make it a ‘zero water’ factory. We’ve already done one of these in Mexico. Effectively what you do is you run the process, but as you’re making sweetened condensed milk, there is residual product, or gray water. You take that gray water through a number of processes over a period of time so that you get to a point where you can to use that gray water over and over again. Every time you bring milk in, you’ve given yourself bring another source of water. Fundamentally, you end up not using any water in that plant.

We’re also really looking to reduce overall water usage. We have ice cream plants further down the Valley where we’re using really targeted methodology that allows us to reduce the amount of water used in the factory, and to recycle and clean gray water. By the time you add all this up, we’ll have invested tens of millions of dollars, and be saving 144 million gallons of water each year. These will be some of the most water-efficient factories in the world.

How do you respond to criticism that water is a human right, and that Nestle is selling it in the form of an unsustainable product?

Look, everybody has the right to good quality food and good clean water. The world has to look after water. We as a company are there to make sure that we use the world’s resources in the most effective manner that we possibly can.

If you look at the way people use water in California, 80% of it is used by agriculture so you have to start the debate there. Then there’s a huge chunk of water used through industry, and that’s something that we’ve got to be very focused on. Whether it’s agriculture, big industry, recreational or individual, there’s enough water to go around, but everybody has to play their part by recognizing it’s a scarce global resource and by treating it with the respect it deserves. As a company, that has always been our commitment.

Since 2013, Nestle has reformulated 1,058 products. What does that involve?

Our commitments on reformulation are either to reduce sodium, the level of sugar, saturated fats, or to take out trans fats in our products—also to take out artificial colors and preservatives. As you can imagine, doing this with more than 1,000 products is quite an undertaking.

On average, a reformulation takes anywhere between 6 to 18 months. Everything you reformulate has to go through trials. When you reformulate something, you have to do it in a way that doesn’t slow the manufacturing lines down. You have to make sure the raw ingredients can be supplied at a high quality and consistent level for the product. And you have to do it in a way that customers accept the formulation and still want to buy and enjoy it.

If you try to create major change overnight you will get a response from your customer base, saying, “Look, this is not why I buy that product.” We tend to be very careful about the changes we make—it’s done hand in hand with consumer testing. Change especially on nutritional side will never be overnight—it has to be gradual, but we want our change to be transparent as well. That’s why we say in these documents, this where we were, this is where are, and this is where we’re going.

There will always be a movement from our company to improve the nutrition, health and wellness credentials of our food. But there is also always a place in a balanced diet for an indulgent treat. One of the things I’m most proud of is our communication in terms of our portion management. We give very clear guidance on our website about the need for balanced diet.

Here’s an example. I have an ice cream business. I have ice cream products that are 35 calories up to 250 calories. My job is to provide you with choices, and to definitely provide you with healthy choices and the information and transparency you need to make up your own mind as to how you want to consume these products. We are in a category in which, if you eat too much ice cream we all know what will happen, but if you want a balanced, indulgent moment with ice cream, we can give you a variety of products depending upon the taste you want and the calories you want to take. It comes back to offering choice to consumers.

What are the greatest challenges to achieving Nestle’s shared value commitments?

This journey to improve our portfolio has led us to some tough choices—it has been a classic case of change management. At first, not everyone on my management team was on board with it. Many of the product innovations, like taking artificial flavors and colors out of our chocolate confections, have been time and resource intensive and that can impact our short-term bottom line. But in the end, we take the long view. We know that over time, doing right for society is not only the right thing, it’s smart business.

Is there ever conflict between your shared value goals and the demands of running a profitable business? How do you handle them?

We knew going in that making changes to improve our performance on nutrition would be disruptive to our business—and they have been. Last year, we evaluated our products that are most popular with children and determined that our Giant Pixy Stix brand did not meet the Nestlé Nutritional Foundation criteria.

While we wanted to keep offering this beloved brand to our consumers, we couldn’t justify serving a single-portioned Giant Pixy Stix that contained one ounce of 99% sugar. Being a product primarily enjoyed by kids, that just didn’t feel right. To solve the Giant Pixy Stix dilemma, we worked with leading consumer behavior scientist Brian Wansink and our packaging experts to design a new straw that would allow us to serve only 0.42 oz per serving in a package that still makes it feel like a substantial treat.

In recent weeks, some in the world of corporate sustainability have worried that the scandal involving Volkswagen, a company previously regarded as a sustainability leader, is damaging to the whole movement. Does this worry you?

We have come to appreciate that transparency is more important than ever. Consumers have high expectations, and we have a responsibility to be as authentic and transparent as possible about how we conduct business. Of course there will always be cynics and setbacks, but we think the shared value movement is here to stay and we’re going to do our part to keep earning our consumers’ trust and respect.